The Bubble of Bearishness Bursts

Editor's note: Mike O'Rourke is chief market strategist for BTIG. His primary focus is identifying short-term catalysts driving daily trading activity and addressing how they fit into the "big picture." This is his first column for TheStreet.com.

Most market observers are widely familiar with the premise that bubbles are formed in an environment of perfect or near-perfect fundamentals.

In those perfect fundamental environments, the bullish mindset is an easy sell. It makes perfect logical sense. Missing a bull market often appears foolish, and betting against one appears even more foolish. In a world in which fiduciaries are expected to be "prudent," making a decision that contradicts logic (even if only in the short term) is a challenge.

Instead, the fundamental strength of a bull market provides logic behind an investment that makes participating in the frenzy a much easier decision. As the idea is popularized, the upward trend in prices becomes self-validating. Eventually, the frenzy creates a valuation issue in which the prices paid for the asset far outstrip the future fundamental prospects.

The bubble of bearishness that persisted earlier this year climaxed in March. The nationalization calls pumped in the last and largest bursts of air. Fed Chairman Ben Bernanke's testimony and statements that the large banks would not be shut down were the pin prick that popped the bearishness. This does not imply we're in a new bull market (only time will tell), but we are well into the healing process, and the stage has been set for an improvement in fundamentals going forward.

Crude Bubbles Up

One of the several recent bubbles was in crude oil last year. There was a set of precepts dominating the crude debate, urging the purchase of crude in the face of a weakening global economy. One key theme that was reiterated was that "the world is using 2 million more barrels per day than we were taking out of the ground."